Removing Interest Deduction Loopholes For Investors

A tax on revenue instead of profit

What Is The Loophole?

In March 2021, Grant Robertson declared that there is a loophole in which property investors could get a tax deduction against their mortgage costs. He “fixed” this by disallowing investors to claim the cost of their mortgage interest payments against their revenue¹.

Controversy Around The Loophole

That’s right, unlike any other business in NZ where you can borrow money for investment then remove the cost of the borrowing against your revenue, you can no longer do that with property investment. Property investment is now the only industry in NZ in which you are taxed against your revenue instead of your profit.

The government sold this policy as a fixing a “loophole” in the tax system which is dishonest because it’s normal that a business should only pay tax on the profit they make from a venture, rather than the revenue.

To call this a “Loophole” is basically a lie and political spin. To people not abreast of the situation, it infers that property investors have some special tax fiddle that no one else can access, and is inequitable. It’s another example of the governments propaganda and inclination to pit groups of New Zealanders against each other.

To put that into perspective, imagine if you buy apples from a farm for $1 each and sell them on the side of the road for $1.10. After “fixing the loophole”, the tax man would take (based on 33% tax) $0.363 tax per apple, leaving a the apple salesman with only $0.737 gross profit per apple. Because the apple is bought for $1, that means it costs the apple salesman $0.263 to sell an apple. That’s why it’s important to tax based on profit ($0.10 in the example) not revenue ($1.10 in the example).

Impact

Note: This article is incomplete. I welcome any assistance in measuring the impact of this policy, especially if you have access to any statistics covering any of the below aspects in my ‘Note to self’. Please leave a comment with your evidence-based information.

Note to self: Update this article with information on this policy’s affect on property prices, rental property supply, rental property price, tax revenue and fairness. Did it have a positive effect on house pricing or significant change to tax revenue or did it have a negative effect on renters and landlords, etc?

1. Source: https://www.stuff.co.nz/national/politics/300259389/housing-government-to-double-brightline-test-and-end-interest-writeoff-in-war-on-property-speculation-will-spend-38b-on-new-supply